Presentation to

Revenue Study Commission Created by SCR 103 of the 2012 Regular Legislative

Session

Jason DeCuir, MBA, JD, BCL, LLM

Chief of Staff, Office of the Secretary

Interim Assistant Secretary,

Office of Legal Affairs

August 15, 2012

Department of Revenue

LSA R.S. § 36:451(B) “The Department of Revenue, through its offices and officers, shall be responsible for assessing, evaluating, and collecting the consumer, producer, and any other state taxes specifically assigned by law to the department, and shall have authority generally for alcoholic beverage control and the regulation of charitable gaming.” Essentially … “to fairly and efficiently collect state revenues to fund public services; and to regulate the sale of alcoholic beverages, tobacco, and charitable gaming within Louisiana.”

Mission

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LDR Revenue Sources Source: Revenue Estimating Conference

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Sales Tax 38%

Individual Income Tax

35%

Severance 11%

Fuels 9%

CIFT 4%

Tobacco 2%

Other 1%

FY 10/11 $6,879.5 Million

LA Tax Structure

• Majority of tax revenue generated from sales tax, personal income tax, and severance tax.

• 78% of general fund revenue is collected by LDR. • The REC adopts the fiscal impact of exemptions

upon their enactment.

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Tax Structure - Rankings

• State Business Tax Climate Index measures all 50 states on corporation, individual income, sales, unemployment insurance, and property taxes.

• Overall, LA ranks #32 in the U.S. • Corporation income component = #17 • Individual income component = #24 • Sales tax component = #49

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Sales Tax

• Base: Sales of tangible personal property, rental or lease of movable property, and sales of selected services.

• Rate: 4% • Highest combined state and local average

sales tax rate in the nation (Tax Foundation, 2012)

• Average local option rate = 4.84% • 191 exemptions

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Individual/Personal Income Tax (PIT) • Base: Federal adjusted gross income

• Effective rate is ~ 2.3% • Federal income tax deduction and other

exemptions lower tax burden • 78 exemptions

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Rate: Married filing jointly, qualified surviving spouse

Rate Taxable Income

2% First $25,000

4% Next $75,000

6% Over $100,000

Rate: Single, married filing separately, or head of household

Rate Taxable Income

2% First $12,500

4% Next $37,500

6% Over $50,000

Severance Tax

• Base: Severance of the oil and gas from the soil or water

• The capable tax rate for oil and condensate is 12.5% of value and accounts for over 95.6% of the oil and condensate tax collections.

• The capable rate for gas, presently 14.8¢ per MCF, is responsible for over 99% of total gas tax collections.

• There are also reduced tax rates for lower-producing oil and gas wells.

• 25 exemptions

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Corporation Income Tax

• Base: Income earned within or derived from sources within Louisiana

• Rates: – 4% on the first $25,000 of taxable income – 5% on the next $25,000 – 6% on the next $50,000 – 7% percent on the next $100,000 – 8% on the excess over $200,000

• Exemptions reduce the tax burden

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Corporation Franchise Tax

• Base: Capital stock, surplus, and undivided profits

• Rates: – $1.50 per $1,000 on the first $300,000 of taxable

base – $3.00 per $1,000 over $300,000

• Legislation was passed to phase out the franchise tax on borrowed capital, with full phase out in franchise tax year 2011.

• Combined, there are 97 CIFT exemptions.

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Tax Exemptions

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• Present in all of Louisiana’s major tax types; the first was enacted in 1912

• Utilized to accomplish policy goals or generate some activity or behavior by reducing the taxpayer’s burden

• 468 exemptions currently exist, 25 of which are authorized by the State’s Constitution or prohibited from taxation by federal law

• Catalogued in the Tax Exemption Budget (“TEB”), first published in 1983

Tax Exemption Reports in Other States

• 44 states (including DC) produce reports that provide data on the value of tax credits, deductions, and exemptions.

• LA’s report catalogs every tax exemption, every year, for every major tax type, and includes fiscal impact data for 5 years

• In terms of frequency and breadth, LA publishes one of the most comprehensive, publicly available reports in the region.

• Many states do not publish their reports on an annual basis, or include exemptions pertaining to all tax types.

• LA is one of 13 states “Leading the Way” in terms of evaluating tax incentives for economic development. (Pew Center on the States, 2012)

Publicly Available Frequency Fiscal Impact Data

Alabama N/A N/A N/A

Arkansas No Unknown (not publicly available)

Unknown (not publicly available)

Florida Yes Annual 1 year

Georgia Yes Every 2 years 3 years

Kentucky Yes Every other year 3 years

Louisiana Yes Annual 5 years

Mississippi Yes Annual 1 year

North Carolina Yes Every 2 years 1 year

Oklahoma* Yes Every 2 years 1 year

South Carolina Yes Annual 2 years

Tennessee Yes Annual 1 year

Texas* Yes Every other year 6 years

Virginia Yes Every year 1 yr. (only sales tax)

West Virginia Yes Every year (exemptions rotate)

1 year

13 * Not a member state of the Southeastern Association of Tax Administrators

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TEB Requirements (R.S. 47:1517) • Due March 1 of each year; submitted to Governor and legislature • Provide statutory citation and purpose • Revenue impact estimates for 5 years (2 years past, current year,

and 2 future years) • Legislative origin and effective date • Description of beneficiaries • Cost of administration and implementation • Determination of exemption’s effectiveness in terms of fulfilling

purpose for which it was enacted • Assessment of whether exemption is most fiscally effective

means of achieving its purpose • Evaluation of whether unintended or inadvertent effects, benefits

or harm was caused by the exemption, including conflicts with other state laws or regulations

• Evaluation of whether the exemption simplifies or complicates the tax statutes

TEB Data Sources for Fiscal Estimates

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• Best data is from Louisiana tax returns – not always available

• When tax return data is not available, alternatives are used, e.g., information from specific taxpayers or estimates from the LFO

Recent TEB-Related Legislation Acts 365 (2011)

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• House Ways & Means and Senate Revenue and Fiscal Affairs shall conduct hearings on the TEB every odd-numbered year

• The committees shall analyze tax exemptions that have caused a revenue loss to the State of $10M or more in any of the last 3 fiscal years

• Committees may report findings or recommendations to the legislature

Definition of Tax Exemption R.S. 47:1517 (E)

• Tax exemptions refer to “ . . . such statutes, which allow a special exclusion, exemption, or deduction from gross income or sales or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”

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Definitions of Various Exemptions

• A tax exemption prevents taxation on an item or class of items that would normally be taxed by law.

• A tax deduction reduces taxable income.

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Credit

• A tax credit is a dollar for dollar reduction of tax liability.

• Tax credits can be nonrefundable or refundable – Refundable: May reduce tax liability to zero; any

remaining credit will be refunded – Nonrefundable: May reduce tax liability to zero

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Example of Deduction Scenario: My federal adjusted gross income is $100,000. I have a deduction of $15,000. I am married and filing jointly with no dependents. My LA Taxable Income is calculated in this manner: Federal AGI $100,000 Deduction -$15,000 My LA Taxable Income $85,000 My LA Tax Rate* 5% (this rate used for demonstration purposes only)

My LA Tax Liability (before credits) $85,000 x .05 = $4,250

If I have credits, I would then subtract them from the $4,250 tax liability. * This rate is used for demonstration purposes only.

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Nonrefundable Credit Example Example 1 – Nonrefundable credit with tax liability greater than tax credit available My LA tax liability is $2,000. I have a credit of $500. LA Tax Liability $2,000 Credit $500 (nonrefundable) New LA Tax Liability (after credit) $1,500 Example 2 – Nonrefundable credit with tax liability less than tax credit available My LA tax liability is $300. I have a credit of $500. LA Tax Liability $300 Credit $500 (nonrefundable) New LA Tax Liability (after credit) $0 ($200 of credit cannot be used)

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Refundable Credit Example Example 1 – Refundable credit with tax liability greater than tax credit available My LA tax liability is $2,000. I have a $500 refundable credit. LA Tax Liability $2,000 Credit -$500 (refundable) New LA Tax Liability (after credit) $1,500 Example 2 – Refundable credit with tax liability less than tax credit available My LA tax liability is $300. I have a $500 refundable credit. LA Tax Liability $300 Credit -$500(refundable) New LA Tax Liability (after credit) -$200 (generates a refund)

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Deduction vs. Credit

Credit Income* $100,000 LA Tax Liability $5,000 Credit -$500 New Tax Liability $4,500

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Deduction Income* $100,000 Deduction -$500 New Income $99,500 x Tax Rate** 5% New Tax Liability = $4,975

* Adjusted gross income ** Rate used for demonstration purposes only

Difference is $475.

Refundable and Nonrefundable Credits Across Tax Types (FYE 6-11)

Individual Income/PIT Credits = 52

Refundable Nonrefundable

20 32

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Corporate Income Tax Credits = 36

Refundable Nonrefundable

13 23

Sales Tax Credits = 4

Refundable Nonrefundable

1 3

Corporate Franchise Tax Credits = 22

Refundable Nonrefundable

10 12

Tax Incentives and Exemption Contracts (Credits) = 25

Refundable Nonrefundable

9 16

Total credits = 139

Rebates • There are 6 rebate mechanisms currently in law

– Enterprise Zones (51:1787) – LA Quality Jobs (51:2451-2462) – Rebate for motor vehicles for use by persons with

orthopedic disabilities (47:305.69) – Digital interactive media and software tax credit – optional

(47:6022) – Louisiana Mega Project Energy Assistance Rebate (51:2367) – University Research and Development Parks (17:3389)

• New rebates from the 2012 legislative session – Student Tuition Organization Rebate (47:6301) – Corporate HQ Relocation Rebate (51:3111 – 3115) – Competitive Projects Payroll (51:3111 ) – Procurement Processing Company Rebate (39:100.126 and

47: 6301)

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Constitution $1,929

28%

Federally Imposed

$142 2%

Statutory $4,842

70%

Total Exemptions $6,914 Million

FY 10/11

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Sales of food for home

$333,666,656 17%

Sales of gasoline,

gasohol, diesel $371,096,720

19% Drugs

prescribed by physicians or

dentists $238,671,405

12%

Sales of power for residential $145,542,064

8%

Corporate Income: federal

income tax deduction

$150,553,357 8%

Individual Income: federal

income tax deduction

$689,844,859 36%

Constitutional Exemptions $1,929,375,061

FY 10/11

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Fuels: interstate

shipments & fed sales

$80,355,000 56%

Tobacco: interstate

shipments & fed sales

$58,306,600 41%

Individual Income: other

$2,832,788 2%

Alcohol: interstate

shipments & fed sales

$837,000 1%

Federal Exemptions $142,331,388

FY 10/11

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Sales tax $1,391,616,707

31%

Income tax - corporation

$1,459,098,421 33%

Income tax - individual

$1,129,817,215 25%

Severance $431,579,224

10%

Other $31,175,141

1%

Statutory Exemptions by Tax Type

$4,443,286,708 FY 10/11

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Motion picture investor tax

credit $174,078,582

44%

Enterprise zones

$90,902,007 23%

Louisiana Quality Jobs

Program $47,917,610

12%

New markets tax credit

$32,311,661 8%

Research and development

tax credit $27,874,721

7%

Other $25,798,349

6%

Tax Incentive and Exemption Contracts FY 2010/11

$398,882,929

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CIFT $220,264,303

55%

Individual Income $143,360,695

36%

Sales $35,257,931

9%

Tax Incentive and Exemption Contracts by Tax Type

FY 2010/11 $398,882,929

Top 10 Exemptions (by dollar value)

Exemption (Tax Type) Authority FY 10-11 Value

1. Federal income tax deduction (PIT, CIFT) LA Constitution $841M

2. Subchapter S corporation (CIT) Statutory $435M

3. Inventory Tax/Ad Valorem Tax Credit (CIFT, PIT) Statutory $374M

4. Sales of gasoline, gasohol & diesel (Sales) LA Constitution $371M

5. Net Louisiana operating loss deduction (CIT) Statutory $343M

6. Sales of food for preparation and consumption in the home (Sales)

LA Constitution $334M

7. Excess federal itemized deductions (PIT) Statutory $332M

8. Sales of electric power/energy – non-residential (Sales) Statutory $257M

9. Insurance company premium tax (CIT) Statutory $249M

10. Personal exemption/standard deduction (PIT) Statutory $244M 32

Top 10 Exemptions – Sales (by dollar value)

Exemption Authority FY 10-11 Value

1. Sales of gasoline, gasohol & diesel LA Constitution $371M

2. Sales of food for preparation and consumption in the home

LA Constitution $334M

3. Sales of electric power/energy – non-residential Statutory $257M

4. Drugs prescribed by physicians or dentists LA Constitution $239M

5. Purchases by state and local governments Statutory $203M

6. Sales of electric power or energy – residential LA Constitution $146M

7. Vendors compensation Statutory $29M

8. Purchases of manufacturing machinery and equipment

Statutory $25M

9. Enterprise Zones Statutory $18M

10. Louisiana Quality Jobs Statutory $17M

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Removed from Sales: Other Exemptions,

$2,894,554,418 , 78%

Revised definition of Sales: Other Exemptions,

$816,412,784 , 22%

Sales: Other Exemptions $3,710,967,202

FY 10/11

Items removed: - Sale for resale: $2,226,580,321 - Auto: $296,877,376 - Gasoline: $371,096,720 - See next slide

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Sale for resale 77%

Gasoline 13%

Autos 10%

Removed from Sales: Other Exemptions

$2,894,554,418 FY 10/11

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Top 10 Exemptions – Individual/PIT (by dollar value)

Exemption Authority FY 10-11 Value

1. Federal income tax deduction LA Constitution $690M

2. Excess federal itemized deductions Statutory $332M

3. Personal exemption – standard deduction Statutory $244M

4. Motion picture investor tax credit Statutory $89M

5. Net income tax paid to other states Statutory $82M

6. Social Security benefits exclusion Statutory $67M

7. State employees, teachers, and other retirement benefit exclusion

Statutory $67M

8. LA Citizens Property Insurance Corporation assessment Statutory $47M

9. Earned income tax credit Statutory $46M

10. Dependent exemption/deduction Statutory $31M

Top 10 Exemptions – Corporation Income & Franchise Taxes (by dollar value)

Exemption Authority FY 10-11 Value

1. Subchapter S Corporation Statutory $435M

2. Inventory tax/ad valorem tax credit Statutory $362M

3. Net Louisiana operating loss Statutory $343M

4. Insurance company premium tax Statutory $249M

5. Federal income tax deduction LA Constitution $151M

6. Motion picture investor tax credit Statutory $85M

7. Enterprise Zones Statutory $49M

8. Louisiana Quality Jobs Statutory $31M

9. Ad valorem tax paid by certain telephone companies Statutory $23M

10. Ad valorem tax credit for offshore vessels Statutory $21M

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Top 10 Exemptions – Other Tax Types (by dollar value)

Exemption (Tax Type) Authority FY 10-11 Value

1. Horizontal wells – natural gas suspensions (Severance) Statutory $235M

2. Inactive wells – oil suspensions (Severance) Statutory $65M

3. Stripper oil (Severance) Statutory $39M

4. Incapable gas – well gas (Severance) Statutory $29M

5. Tertiary recovery – oil suspensions (Severance) Statutory $20M

6. Incapable oil (Severance) Statutory $13M

7. Deep wells – oil suspensions (Severance) Statutory $10M

8. Gas consumed in field operations (Severance) Statutory $9M

9. Discount of six percent for tobacco stamps (Tobacco) Statutory $7M

10. Discount for timely filing and payment by suppliers/permissive suppliers – gasoline (Petroleum)

Statutory $7M

38 “Other” includes severance, petroleum, tobacco, misc.

THANK YOU

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